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After GoPro, What's Next for IPO Market and ETFs?

As the U.S. markets are climbing once again and hovering around their multi-year highs, the spotlight is once more on the IPO market. After delivering an amazing performance in 2013, the IPO market softened in the beginning of 2014.

A host of weak data points in the wake of the worst winter in decades, a prolonged face-off between Russia and the West on the Ukrainian issue, weakness in global markets, overvaluation concerns and sell-offs in glamour stocks throttled the markets in Q1.

As a result, the U.S. economy slipped 2.9% and the S&P 500 index managed to gain only about 2.2% in Q1, taking steam out of the IPO markets. Several IPOs slated to hit the markets were soon dropped (read: Cooling IPO Market Puts These ETFs in Focus).

However, the space once again perked up with the onset of summer. As many as 139 IPOs were issued in the U.S. as of June 25 indicating a year-over-year rise of 63.5%. Renaissance Capital noted that IPO issuances in Q2 increased 30% sequentially and 36% year over year.

In fact, Renaissance Capital's view on Q1 IPO activity was also bullish. The research agency cited that during this time frame, companies raised $10.6 billion – indicating the busiest level of activity than any other first quarter since 2000. Biotech was the busiest sector in the IPO market in 1Q14 while the second quarter brought forward tech, energy, financial and consumer sectors in terms of activities.

Notable IPOs of Q2

The success was widespread. While growth stocks witnessed massive sell-offs in Q1 thanks to valuation concerns, these rebounded in Q2 and some IPOs tasted successes too. In Q2, GoPro’s (GPRO - Free Report) had runaway success with its IPO, also validating investors’ enthusiasm for the new entrees.

The quarter saw 10 Chinese companies listing their shares on U.S. exchanges. Renaissance Capital further noted that this was the maximum count since 4Q10. Among the lot, JD.com’s IPO emerged a winner with 15 times oversubscription and pricing above expectations (read: Can IPO ETFs Remain Hot in 2014?).

Further, as many as 117 companies wished to go public in Q2. The tally is 19% higher than the preceding quarter and 54% more than the year-ago quarter as noted by Renaissance Capital. Witnessing a long lineup of IPO filings, we can expect this frenzy to last for some more months given no major shift in the global economy.

ETF Impact

Thanks to these fundamentals, many investors might be looking to allot more to companies that have just entered the market. While buying these newly trading securities is certainly one way to do it, investors may want to consider an ETF approach to get basket exposure to this space.

Given this, it might be worth it to shed some light on IPO ETFs and their holdings for those who are unaware of the products, but keen on jumping in on the space. The two ETFs are First Trust US IPO Index Fund (FPX) and Renaissance IPO ETF (IPO). Below, we highlight some of the key details of FPX and IPO and see how the recent burst in IPOs, and the investor interest in the space, could make these interesting choices for the future:

FPX in Focus

This ETF provides exposure to the booming U.S. IPO market by tracking the IPOX-100 U.S. Index. The fund has accumulated $481.1 million in AUM. It charges 60 bps in fees a year.

In total, the fund holds 100 securities in its basket with the largest allocation going to Facebook (10.32%). Abbvie (8.99%) and General Motors (6.26%) take up the next two positions. Since the ETF focuses on the 100 largest and most liquid U.S. IPOs, new companies can make it to the fund’s holding after trading for a minimum of 100 days (read: GoPro IPO Puts These ETFs in Focus).

Consumer discretionary, information technology, healthcare and energy round out the top four sectors of the ETF. FPX has added 5.40% year-to-date.

IPO in Focus

This is a new entrant in the IPO ETF space that has attracted $26.5 million in asset base. This ETF sees low daily average volume of nearly 10,000 shares, suggesting there may some bid ask spread issues, possibly increasing costs beyond the expense ratio of 0.60%.

Holding 66 stocks in the basket, the fund follows the Renaissance IPO Index, which holds the largest and most liquid newly listed U.S. initial public offerings. New companies seek inclusion on a ‘fast entry basis’ on the fifth day of trading.

JD.com is also slated to enter the ETF. Currently, the product allocates more to Zoetis at 9.67%, closely followed by Twitter (9.32%) and Hilton Worldwide Holdings (4.72%).

From a sector look, technology stocks make up for one-fourth share followed by oil & gas (15.8%), consumer services (15.2%) and financials (14.6%). The fund has gained about 1.88% year to date (as of July 14, 2014).

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